Beyond the home-buyer tax credit

Homeowners are eligible for many breaks at tax time

CHICAGO (MarketWatch) -- A tax credit of up to $8,000 was a big incentive for first-time buyers to buy a house over the last couple of years, but a slew of other tax advantages will keep rewarding those new homeowners long after that money hits their bank accounts.

One of the most cherished homeowner tax deductions is the ability to deduct mortgage interest and property taxes. But the tax benefits of homeownership don't stop there.

Consider the following points from CCH Inc., a Riverwoods, Ill., tax publisher and unit of Wolters Kluwer:

Homeowners can deduct interest paid on mortgage debt of up to $1 million. Your principal residence and one additional residence are eligible for the break.

State and local property taxes are also itemized deduction. Or, non-itemizing homeowners can take their state and local taxes as an additional standard deduction of up to $500 for single filers or $1,000 for joint filers on their returns for the 2009 tax year.

Homeowners can deduct interest on home-equity loans of up to $100,000. For the purposes of the alternative minimum tax, interest on these loans is deductible only if the funds were used to acquire, build or substantially improve a home.

And for 2009 and 2010, mortgage insurance premiums are deductible as mortgage interest, as long as the insurance was acquired on or after Jan. 1, 2007.

To claim most of these, you will have to itemize on your return, something that as a renter you might not have done in the past.

For that reason, once you become a homeowner it's a good idea to keep track of anything that could also be a deduction, including medical expenses, charitable donations or business expenses, including association dues and subscriptions, said John W. Roth, senior tax analyst for CCH.

"Record keeping is so important," said Audrey Victor, certified public accountant and a senior manager for Rehmann, a CPA and business-consulting firm based in Troy, Mich. Dedicate a file folder or a shoebox at the beginning of the year to consolidate any receipts that could qualify as deductions, she said.

Home improvement

It's also a good idea to keep records on improvements made to your home.

"Ordinary expenses for maintaining your home are not deductible on your tax return," said Kelly Smith, director of individual tax for 2nd Story Software, makers of TaxACT. However, "those that add value... increase the cost basis of your home for when you go to sell your home later on," she said.

Homeowners can exclude up to $250,000 of gain on the sale of their homes (up to $500,000 for joint filers), if they have owned and lived in the home two out of the five years before the sale, according to CCH.

For some home improvements, tax benefits pay off now.

Install certain energy-efficient exterior doors and windows, and you could get a 30% tax credit for 2009 and 2010. Same goes for other improvements, including qualified insulation, furnaces, central air conditioners and water heaters. There's a $1,500 cap on the credit for the total improvements done over the course of the two years. Watch out, though: Installation costs qualify for the credit for only some of the improvements. Read more on the IRS.gov Web site.

"This, out of any credit for residential, has been one of the biggest incentives that people are taking advantage of," Victor said.

By spending $5,000 on these improvements, a homeowner can save as much as $1,500 on his or her tax return, according to the IRS.

"I wouldn't run out and replace the water heater because you get a credit. But if it's something you need to do or will need to do before the end of the year then yes, I would do it," Roth said.

To make sure the improvements qualify, get the recommendations of the installer or a home-improvement store employee -- then double-check those recommendations by doing research of your own, Victor said.

Another 30% credit is also available for those who install alternative energy equipment, including fuel cells, solar water heaters, solar electric equipment, wind turbines and geothermal heat pumps. There's no cap on that credit.

Foreclosure forgiveness

While many new homeowners are celebrating their recent purchase, others are in a battle to keep their homes. There's tax help for them, too.

In general, forgiven debt is considered income and taxed as such, but the government has eased those rules during the current housing crisis. Currently, the IRS allows you to exclude from income the forgiven debt from a home-loan modification or a foreclosure. When a homeowner's debt of up to $2 million on their residence is forgiven due to a write-down or foreclosure it's not treated as "cancellation of debt income," and no tax is owed.

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